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House Judiciary Committee to Hold Hearing Next Wednesday Examining SBRA, HAVEN Act, Chapter 12, Student Debt and More

ABI Bankruptcy Brief

June 13, 2019

 
ABI Bankruptcy Brief
 
NEWS AND ANALYSIS

House Judiciary Committee to Hold Hearing Next Wednesday Examining SBRA, HAVEN Act, Chapter 12, Student Debt and More

The House Judiciary Subcommittee on Antitrust, Commercial and Administrative Law will hold a hearing next Wednesday at 2 p.m. EDT titled "Oversight of Bankruptcy Law and Legislative Proposals." Robert J. Keach of Bernstein Shur (Portland, Maine), a former ABI President and co-chair of the ABI Commission to Study the Reform of Chapter 11, will testify on ABI's behalf. The hearing will examine a number of bills and priority issues important to business and consumer bankruptcy practice. Most of the bills enjoy bipartisan and bicameral support in Congress. The following are the legislation and issues to be discussed:

- The Small Business Reorganization Act (S. 1091) takes into account recommendations from ABI's Chapter 11 Commission to remove barriers to bankruptcy for financially struggling small and medium-sized businesses.

- The Family Farmer Relief Act of 2019 (H.R. 2236; S. 897) is supported by ABI to raise the debt cap to $10 million for family farmers seeking chapter 12 protection.

- Honoring American Veterans in Extreme Need Act of 2019 (HAVEN Act) (H.R. 2938; S. 679) would exclude VA and DoD disability payments from the monthly income calculation used for bankruptcy means testing. The law currently allows Social Security benefits to be excluded from the calculation, but not veterans disability payments. ABI's Veterans’ Affairs Task Force member Holly Petraeus is scheduled to testify.

- Puerto Rico Recovery Accuracy in Disclosures Act of 2019 (PRRADA) (H.R. 683; S. 1675) would impose certain requirements on the payment of compensation to professional persons employed in voluntary cases commenced under PROMESA.

- The subcommittee will also be looking at the issue of student loan debt treatment in bankruptcy, which was the subject of the first set of reform recommendations in the Final Report of the ABI Commission on Consumer Bankruptcy. Commissioners Prof. Dalié Jiménez of the UC Irvine School of Law and Ed Boltz of the Law Offices of John T. Orcutt, P.C. (Durham, N.C.) will be testifying on the issue.

For further information on the hearing and to obtain forthcoming witness testimony, please click here.

Senator Warren to Introduce Bill Cancelling Up to $50,000 in Student Debt for Most Borrowers

Sen. Elizabeth Warren (D-Mass.) plans to introduce legislation in the coming weeks that mirrors her presidential campaign proposal to cancel at least a portion of the student debt held by many of the nation’s 44 million borrowers, MarketWatch.com reported. House Majority Whip James Clyburn (D-S.C.) will introduce companion legislation in the House of Representatives. Warren’s office hasn’t yet released a draft of the legislative text, but the bill is slated to propose cancelling up to $50,000 in student debt for the bulk of student loan borrowers, her office announced. Under the proposal Warren released as part of her presidential campaign in April, borrowers with a household income of less than $100,000 would have $50,000 of their student debt cancelled and borrowers with an income between $100,000 and $250,000 would be eligible for some student debt cancellation — though not the full $50,000. Borrowers earning $250,000 or more would receive no debt cancellation. Her campaign estimated that the plan would cost $640 billion.



In related news, only a small percentage of companies help their employees with student loan payments, despite it being a sought-after perk. But that could change dramatically if a proposed tweak to the Tax Code gains momentum in Congress, the Wall Street Journal reported on Tuesday. There is no doubt that employees would welcome some kind of loan-relief benefit. A recent survey by YouGov commissioned by health care company Abbott Laboratories found that 64 percent of adults with student loan debt say that finding a company with student loan benefits is important. Yet last year, only about 4 percent of employers offered student loan repayment assistance as a workplace benefit, data from the Society for Human Resource Management show. Many HR managers say the biggest obstacle is the tax treatment that student loan repayment assistance currently gets. Employers have to pay a payroll tax on the contributions, while employees who receive such assistance have to report it as taxable income. To remove that snag, lawmakers in both houses of Congress earlier this year reintroduced bipartisan legislation that would permit employers to contribute up to $5,250 annually tax-free toward an employee’s student loans. The bills would accomplish this by expanding the section of the Tax Code that currently allows companies to provide tax-free tuition-reimbursement assistance in that amount to workers seeking to further their education. (Subscription required.)



A special ABI Podcast will be released later this month looking at the Consumer Commission’s recommendations on student loan debt and bankruptcy.

Risky Borrowing Is Making a Comeback, but Banks Are on the Sidelines

A decade after reckless home lending nearly destroyed the financial system, the business of making risky loans is back, the New York Times reported on Tuesday. This time, the money is bypassing the traditional, and heavily regulated, banking system and flowing through a growing network of businesses that have stepped in to provide loans to parts of the economy that banks abandoned after 2008. With almost $15 trillion in assets, the shadow-banking sector in the U.S. is roughly the same size as the entire banking system of Britain, the world’s fifth-largest economy. In certain areas — including mortgages, auto lending and some business loans — shadow banks have eclipsed traditional banks, which have spent much of the last decade pulling back on lending in the face of stricter regulatory standards aimed at keeping them out of trouble. But new problems arise when the industry depends on lenders that compete aggressively, operate with less of a cushion against losses and have fewer regulations to keep them from taking on too much risk. Recently, a chorus of industry officials and policymakers — including Federal Reserve Chair Jerome H. Powell — have started to signal that they’re watching the growth of riskier lending by these nonbanks. “We decided to regulate the banks, hoping for a more stable financial system, which doesn’t take as many risks,” said Amit Seru, a professor of finance at the Stanford Graduate School of Business. “Where the banks retreated, shadow banks stepped in.” Lately, that lending is coming from companies like Quicken Loans, loanDepot and Caliber Home Loans. Between 2009 and 2018, the share of mortgage loans made by these businesses and others like them soared from 9 percent to more than 52 percent, according to Inside Mortgage Finance. While they don’t have a nationwide regulator that ensures safety and soundness like banks do, non-banks say that they are monitored by a range of government entities, from the Consumer Financial Protection Bureau to state regulators.

Analysis: U.S. Tax Changes to Favor Companies over Lenders in Next Downturn

Companies that fund their businesses with highly leveraged loans and bonds are set to benefit from changes to the U.S. Tax Code that will allow them to raise cheap new financing by guaranteeing the debt with foreign assets, although the move could penalize existing lenders, according to a Reuters analysis. As well as offering cheaper borrowing costs, the analysis said that the tax change could be a lifeline for distressed companies that allows them to survive the next downturn by accessing new funds backed by foreign collateral at market rates, rather than paying punitive pricing. The changes could weaken existing lenders’ positions if companies run into trouble, as they could be barred from making direct claims on the revenue generated by foreign assets and subsidiaries. The Treasury Department and the Internal Revenue Service (IRS) published final regulations to section 956 of the Tax Code in May that allows U.S. companies to guarantee debt with revenue from foreign entities without incurring U.S. taxes. This has previously been an obstacle to pledging overseas assets and revenue. “If the borrower has the ability and desire to do their homework … the spectrum of possibilities, especially for corporations, is much larger as to what they can do without incurring tax in the U.S.,” said Elena Romanova, a partner at law firm Latham & Watkins. Access to new collateral to raise financing in the $1.2 trillion loan market to repay debt or fund operations is expected to be cheaper and could even help distressed companies avoid bankruptcy.


 

Law Students Press SCOTUS to Make Legal Tools Free Nationwide

More than 100 law students, along with nearly 100 solo and small-firm practitioners and legal educators, are urging the U.S. Supreme Court to eliminate copyright protection for state annotated codes of law and certain other state and local legal materials, the National Law Journal reported. The case Georgia v. Public.Resource.Org is unusual in that both parties, and all of the friends of the court, including the law students, want the justices to take up and decide the case — but for different reasons. The justices are scheduled to take their first look at the case in their private conference scheduled for today. At the center of Georgia’s petition at the Supreme Court is the “government edicts” doctrine, a judicially created exception to copyright protection for certain works that have the force of law. The doctrine dates to the 1800s, and three high court opinions have held that judicial opinions are not copyrightable. The justices have not addressed it since, but it has been applied by lower courts also to exempt statutes from copyright protection. Georgia asked the justices to reverse a decision last year by the U.S. Court of Appeals for the Eleventh Circuit. The appeals court, applying the government edicts doctrine, invalidated the state’s copyright in the Official Code of Georgia Annotated. Georgia had sued nonprofit Public.Resource.Org for alleged infringement after it posted volumes of the annotated code online. The annotated code contains such materials as summaries of judicial decisions and state attorney general opinions. The code without annotations is free to the public.

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BLOG EXCHANGE

New on ABI’s Bankruptcy Blog Exchange: CFTC Holds a Public Meeting to Address Climate-Related Financial Risks

The Commodity Futures Trading Commission’s (CFTC) Market Risk Advisory Committee (MRAC) held a public meeting yesterday focusing on climate-related financial risks, according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

 
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